Using the Starbucks financial statements provided on Blackboard, calculate and i
ID: 2548457 • Letter: U
Question
Using the Starbucks financial statements provided on Blackboard, calculate and interpret the operating cycle. Assume 20% of all sales are credit sales.
STARBUCKS CORP 10-K Income Statement in millions of dollars, except for per share figures Fiscal Year Ended 10/1/2017 10/2/2016 9/27/2015 9/28/2014 Net revenues: Company-operated stores $17,650.7 $16,844.1 $15,197.3 $12,977.9 Licensed stores 2,355.0 2,154.2 1,861.9 1,588.6 CPG, foodservice and other 2,381.1 2,317.6 2,103.5 1,881.3 Total net revenues $22,386.8 $21,315.9 $19,162.7 $16,447.8 Cost of sales including occupancy costs 9,038.2 8,511.1 7,787.5 6,858.8 Store operating expenses 6,493.3 6,064.3 5,411.1 4,638.2 Other operating expenses 553.8 545.4 522.4 457.3 Depreciation and amortization expenses 1,011.4 980.8 893.9 709.6 General and administrative expenses 1,393.3 1,360.6 1,196.7 991.3 Litigation charge (credit) 0.0 0.0 0.0 (20.2) Restructuring & impairments 153.5 0.0 0.0 0.0 Total operating expenses 18,643.5 17,462.2 15,811.6 13,635.0 Income from equity investees 391.4 318.2 249.9 268.3 Operating income $4,134.7 $4,171.9 $3,601.0 $3,081.1 Gain from acquisition of joint venture 0.0 0.0 390.6 0.0 Loss on extinguishment of debt 0.0 0.0 (61.1) 0.0 Interest income and other, net 275.3 108.0 43.0 142.7 Interest expense (92.5) (81.3) (70.5) (64.1) Earnings before income taxes $4,317.5 $4,198.6 $3,903.0 $3,159.7 Income taxes (benefit) 1,432.6 1,379.7 1,143.7 1,092.0 Net earnings including noncontrolling earnings $2,884.9 $2,818.9 $2,759.3 $2,067.7 Net earnings (loss) attributable to noncontrolling interests 0.2 1.2 1.9 (0.4) Net earnings attributable to Starbucks $2,884.7 $2,817.7 $2,757.4 $2,068.1 Earnings per share - basic $1.99 $1.91 $1.84 $1.37 Earnings per share - diluted $1.97 $1.90 $1.82 $1.35 Weighted average shares outstanding: Basic (adjusted for split) 1,449.5 1,471.6 1,495.9 1,506.3 Diluted (adjusted for split) 1,461.5 1,486.7 1,513.4 1,526.3 Cash dividends declared per share $1.05 $0.85 $0.68 $0.55 STARBUCKS CORP 10-K Balance Sheet in millions of dollars As of 10/1/2017 10/2/2016 9/27/2015 9/28/2014 ASSETS Current assets: Cash and cash equivalents $2,462.3 $2,128.8 $1,530.1 $1,708.4 Short-term investments 228.6 134.4 81.3 135.4 Accounts receivable, net 870.4 768.8 719.0 631.0 Inventories 1,364.0 1,378.5 1,306.4 1,090.9 Prepaid expenses and other current assets 358.1 347.4 334.2 285.6 Total current assets $5,283.4 $4,757.9 $3,971.0 $3,851.3 Long-term investments 542.3 1,141.7 312.5 318.4 Equity and cost investments 481.6 354.5 352.0 514.9 Property, plant and equipment, net 4,919.5 4,533.8 4,088.3 3,519.0 Deferred income taxes, net 795.4 885.4 1,180.8 1,220.7 Other long-term assets 362.8 403.3 415.9 198.9 Other intangible assets 441.4 516.3 520.4 273.5 Goodwill 1,539.2 1,719.6 1,575.4 856.2 TOTAL ASSETS $14,365.6 $14,312.5 $12,416.3 $10,752.9 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities: Accounts payable $782.5 $730.6 $684.2 $533.7 Accrued liabilities 1,934.5 1,999.1 1,755.3 1,514.4 Insurance reserves 215.2 246.0 224.8 196.1 Stored value card liability 1,288.5 1,171.2 983.8 794.5 Current portion of long-term debt 0.0 399.9 0.0 0.0 Total current liabilities $4,220.7 $4,546.8 $3,648.1 $3,038.7 Long-term debt 3,932.6 3,185.3 2,347.5 2,048.3 Other long-term liabilities 755.3 689.7 600.9 392.2 Total liabilities $8,908.6 $8,421.8 $6,596.5 $5,479.2 Shareholders equity: Common stock ($0.001 par value) 1.4 1.5 1.5 0.7 Additional paid-in capital 41.1 41.1 41.1 39.4 Retained earnings 5,563.2 5,949.8 5,974.8 5,206.6 Accumulated other comprehensive income/(loss) (155.6) (108.4) (199.4) 25.3 Total shareholders equity 5,450.1 5,884.0 5,818.0 5,272.0 Noncontrolling interests 6.9 6.7 1.8 1.7 Total equity 5,457.0 5,890.7 5,819.8 5,273.7 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY $14,365.6 $14,312.5 $12,416.3 $10,752.9 STARBUCKS CORP 10-K Cash Flows in millions of dollars Fiscal Year Ended 10/1/2017 10/2/2016 9/27/2015 9/28/2014 OPERATING ACTIVITIES: Net earnings including noncontrolling interests $2,884.9 $2,818.9 $2,759.3 $2,067.7 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 1,067.1 1,030.1 933.8 748.4 Deferred income taxes, net 95.1 265.7 21.2 10.2 Income earned from equity method investees (310.2) (250.2) (190.2) (182.7) Distributions received from equity method investees 186.6 223.3 148.2 139.2 Gain resulting from acquisition/sale of equity in joint ventures & certain retail operations (93.5) (6.1) (394.3) (70.2) Loss on extinguishment of debt 0.0 0.0 61.1 0.0 Stock-based compensation 176.0 218.1 209.8 183.2 Excess tax benefit on share-based awards (77.5) (122.8) (132.4) (114.4) Goodwill impairment 87.2 Other 68.9 45.1 53.8 36.2 Cash provided/(used) by changes in operating assets and liabilities: Accounts receivable (96.8) (55.6) (82.8) (79.7) Inventories 14.0 (67.5) (207.9) 14.3 Accounts payable 46.4 46.9 137.7 60.4 Accrued litigation charge 0.0 0.0 0.0 (2,763.9) Stored value card liability 130.8 180.4 170.3 140.8 Other operating assets and liabilities (4.7) 248.8 261.5 418.3 Net cash provided by operating activities $4,174.3 $4,575.1 $3,749.1 $607.8 INVESTING ACTIVITIES: Purchase of investments (674.4) (1,585.7) (567.4) (1,652.5) Sales of investments 1,054.5 680.7 600.6 1,454.8 Maturity and calls of investments 149.6 27.9 18.8 456.1 Acquisitions, net of cash acquired 0.0 0.0 (284.3) 0.0 Additions to property, plant and equipment (1,519.4) (1,440.3) (1,303.7) (1,160.9) Cash proceeds from sale of equity in joint ventures 85.4 69.6 8.9 103.9 Other 54.3 24.9 6.8 (19.1) Net cash used by investing activities ($850.0) ($2,222.9) ($1,520.3) ($817.7) FINANCING ACTIVITIES: Proceeds from issuance of long-tem debt 750.2 1,254.5 848.5 748.5 Principal payments on long-term debt (400.0) 0.0 (610.1) 0.0 Cash used for purchase of noncontrolling interest 0.0 0.0 (360.8) 0.0 Proceeds from issuance of common stock 150.8 160.7 191.8 139.7 Excess tax benefit from exercise of stock options 77.5 122.8 132.4 114.4 Cash dividends paid (1,450.4) (1,178.0) (928.6) (783.1) Repurchase of common stock (2,042.5) (1,995.6) (1,436.1) (758.6) Minimum tax withholdings on share-based awards (82.8) (106.0) (75.5) (77.3) Other (4.4) (8.4) (18.1) (6.9) Net cash used by financing activities ($3,001.6) ($1,750.0) ($2,256.5) ($623.3) Effect of exchange rate changes on cash and cash equivalents 10.8 (3.5) (150.6) (34.1) Net increase/(decrease) in cash and cash equivalents $333.5 $598.7 ($178.3) ($867.3) CASH AND CASH EQUIVALENTS: Beginning of period 2,128.8 1,530.1 1,708.4 2,575.7 End of the period $2,462.3 $2,128.8 $1,530.1 $1,708.4 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest, net of capitalized interest $96.6 $74.7 $69.5 $56.2 Income taxes, net of refunds $1,389.1 $878.7 $1,072.2 $766.3Explanation / Answer
Operating cycle is the composite of Day's sales of Inventory and Day's sales outstanding.
Day's sales of Inventory = (Average Inventories/Purchases) x 365
Day's sales outstanding = (Average Accounts receivable/Credit sales) x 365
Day's sale of Inventory represent number of days taken by any organsiation in converting purchases made into sales.
While Day's sales outstanding represents number of days taken by any organisation in converting credit sales into cash or in other words time taken by any organsiation for recovery from its debtors.
Operating cycle = Day's sales of Inventory + Day's sales outstanding
In the given case case we will calculate it as,
Day's sale of inventory = (Average Inventories/Cost of sales including occupancy costs) x 365
Cost of sales including occupancy costs is used becuse other expenses our also incurred on purchased goods for converting them into finished goods. So those other expenses will also be considered for calculating Day's sale of inventory.
Average inventory = (Inventories as on 10/1/2017 + Inventories as on 10/2/2016)/2
= (1364 + 1,378.5)/2 = 1371.25
Day's sale of inventory = (1371.25/9038.2) x 365 = 55.38 days
Day's sales outstanding = (Average accounts receivables/Credit sales) x 365
= {Average accounts receivables/(20% of net revenue)} x 365 [it is given that 20% of all sales are credit sales]
Average accounts receivable = (Accounts reeivable as on 10/1/2017 + Accounts receivable as on 10/2/2016)/2
= (870.4 + 768.8)/2 = 819.6
20% of net revenue = (20/100) Net revenue = (20/100) 22386.8 = 4477.36
Day's sales outstanding = (819.6/4477.3) x 365 = 66.81 days
Therefore, operating cycle = 55.38 + 66.81 = 122.19 days
It means that company takes 122.19 days to convert inventories into cash realized from cash sales as well as recovery from debtors on credit sales. Of 122.19 days 55.38 days are consumed in realizing stock into sales while the rest 66.81 days are consumed in recovery from debtors.
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